Nabil Al-Najjar, Northwestern University

Knight and Knightian Uncertainty

I recently re-read Knight's book. The book, submitted as his Ph.D. thesis at Cornell in 1914, is difficult to read but is full of ideas. What is clear is that: ``Knight shared the modern view that agents can be assumed always to act as if they have subjective probabilities.'' (LeRoy and Singell, Knight on Risk and Uncertainty, JPE 1987)

In one-shot situations, such as the Ellsberg urn experiments, Knight indicated very clearly that there cannot be a distinction between risk and uncertainty, and that rationality requires Bayesian reasoning and behavior. Whatever motivates Ellsberg experimental subjects, be it paranoia or probabilistic illiteracy, is not Knightian uncertainty--at least as far as Frank Knight is concerned.